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  • What To Do With A Large Allocation Of Cash.

    The topic of this article is what to do when you have a large allocation of cash in your portfolios. Investors in America are currently heavy in bonds and straight cash from fears of the fiscal cliff and global slowdowns. I do not believe in people having the title investor if more than 10% of their portfolio is in cash as it's an asset that year after year can lose money.

    Cash is a currency, which is a store of value. You want something that grows in value, simple as that, cash loses money every year almost guaranteed, even after factoring for its grand use of liquidity. Some investors give a very liberal view to cash and say have 15% or more in cash to capture opportunities. There are always opportunities in the markets! You can always find an investment instrument to exercise your ideas. Opportunities do not fall in your lap, I think the Efficient market hypotheses is right in this respect and makes opportunities very hard to find in the short term. These are three ways to handle that extra money that is doing nothing but gathering cobwebs in your local banks hard drives.

    1. 1. Hedge out your risks.

    In my simulator portfolio I have a large long position in Toyota. I like Toyota from a marketing, finance and even engineering point of view, but I am not 100% sure it's in a good sector. I am not worried about aluminum, or rubber prices, nor labor wages at Japanese factories individually. But collectively they make up the risks of Toyota. I do not have the time to research each risk extensively; it's much easier to simply short companies with the same correlations and variables. With this view you have to consider the hedging stock as a commodity and not as a company. In this particular case I took a 10% short position in both Nissan Motors (OTCPK:NSANY) and Honda (NYSE:HMC). These three guys all share very similar market risks. Supply chain problems from an earthquake would usually kill Toyota (NYSE:TM), but not if you were prepared with a hedge similar to this one.

    The best thing about #1 is that you can keep cash. You need the cash to cover your shorts, but with that it's serving a purpose other than just sitting there. If you cannot tell already I cannot stand underinvested portfolios! And if you want to capture short term trades you can more easily take advantage of them with a lot of shorts balancing out your longs.

    2. 2. Add 1-3% in each position.

    This is kind of blind; you simply plow your gains back, equally or not, into your same holdings. This is really good by making you re-consider your positions. When you're about to put more money up for an old holding it's like a balloon, the surface is the same color and texture, it's just bigger and can release more air in the future

    3. 3. Hold gold, the real currency.

    I think of gold as the world's international currency. The shiny substance is a store of value, but one the government can't just print more of. I think the best way to look at gold is your new cash. You could convert all of your savings to a gold ETF (NYSEARCA:GLD) and think of it as cash instead of whining about the dollar losing value. For those that rely on salary though it's not as important as you will bite the bullet of inflation further and further down the road as you earn your money. It's better to take all your money now and convert it into gold and liquidate it for dollars accordingly (Or any other currency that has a good exchange rate to gold).

    Those three things should give you a springboard to start new ideas and get that cash to work. Remember, we are investors, not currency holders. You want to own assets that gain in value and that have great futures. Currencies have shown throughout history that they always fall. In our lifetime we will see a major currency fall and I guarantee you gold would get a higher premium than the same value in another major currency, absent of algorithmic corrections and arbitragers. The reason we still deal with it is because we have been brainwashed into thinking paper money is worth anything and we become absolutely frantic when the fiat tale appears to be coming to an end. It's like we finally realize that we need a currency not controlled a central bank. So go out there and make your money work for you, don't let it take a cooler break when there is much to be done!

    Michael G. Morrison

    Morrison International Accounting

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: HMC, TM, GLD
    Nov 26 6:26 PM | Link | Comment!
  • A Fundamentalist Value Of Wells Fargo.

    (I am writing this article for investors in general, my investing horizon for this stock is long (1 year or more) and the risk is those that usually accompany equities. Before investing in any of the stocks mentioned, consult a financial professional. I have no ties to Wells Fargo and am writing this piece for no compensation.)

    Wells Fargo (NYSE:WFC) was started in San Francisco more than 150 years ago. The bank catered to the settling mining industry and the businessman who accompanied them on their way West. It has since grown, like most current banks, from mergers and acquisitions throughout the years and is now worth 175 billion in current market cap and servicing just about anything to do with money.

    Wells Fargo has a corporate culture of conservative loans, avoiding bubbles and buying low for its M&A activity. The company was the only one of the large banks to have a AAA rating in 2007. It picked up Wachovia for about 20% of its original value pre-mortgage meltdown in 2nd-3rd quarter 2007.

    According to the chart above any bank owning home price related assets should have seen massive trouble from this bubble bursting. Not Wells Fargo though. According to their 2007 annual statement Tier one capital only fell 1.5% points from 2006 to the end of 2007, from roughly 9% to roughly 7.5%. Net income fell slightly, about 5%, from 8.42 billion to 8.05 billion.

    That's pretty exceptional compared to the drops in its rival earning. Wells took advantage of its position and hurt competition and rapidly gained market share in deposit base. They also originated loans other banks were not capitalized or willing to make. Wells found a large consumer base of middle and lower class citizens, who banked at Wachovia (retail banking is what Wall Street calls these customers) and was trying to fit them into their model also. So how did the banking sector do in this time period with mortgages, the cornerstone of their earnings, falling apart?

    Bank Earnings

    (Source-Bill Conerly Ph.D)

    Not to well, pretty much any bank that got caught holding mortgage related securities in a game like hot potato suffered huge losses. Wells was different. Their earnings from the year 2008 was positive, they earned 2.8 billion, even after finalizing the acquisition of Wachovia. Local, state, regional, national and especially international players did not fare as well as Wells and Wells managers went to work and could focus on the future, others were trying to make it to years end.

    Wells dodged this initial meltdown but still faced some affects from the slowed economy and mortgage lawsuits that accompanied their acquisition of Wachovia. When you buy a bank you take on all of their liabilities, both financial and legal. Many banks were very secretive of how bad their balance sheets really were and I imagine Wells Fargo overpaid for Wachovia, although they did not overpay as much as others did, such as Bank of America (NYSE:BAC) with Merrill Lynch and J.P Morgans (NYSE:JPM) purchase of WAMU. They took (and are taking) all the lawsuits in stride and fight along with their competitors to get off the hook.

    Wells has been shoring up its balance sheets the past couple of years after the merger was completed. This has really kept earnings low. Wells has had to rely on simple and safe income streams. No longer was the small amount of leverage Wells used before even there.

    (Source-BBS-Clutchfans)

    Add to that Wells getting ready for BASEL 3 and you will see that Wells has had some bad macro years and has dealt with each of them in stride. It is very hard to tell if its management luck or just something else. I think Wells Fargo has shown evidence that the right guys are up top and they echo the right values down the ranks accordingly. I would imagine a loan officer who has a high default rate on loans He/She issues would stand out like a sore thumb. The main reason why Wells Fargo attracts good talent is their corporate culture according to a company official, hopefully their conservative nature will also expel corrupt and heavy risk taking talent.

    Beyond attracting good talent, these employees find a bank that has more ammunition than others to work with. If the economy improves Wells will be the first into the pool dominating the medium risk, medium return loans. Their reputation is strong amongst consumers and many shun the other TBTF banks due to their involvement with being risk takers.

    I am a young man looking to go into accounting and would love to work at Wells Fargo, their conservative style seems safe for a career. they have cut about 2,000 jobs while Bank of America cuts 16,000. Wells Employs about 267k people and Bank Of America (BAC) 272k. I would feel more comftorable at Wells Fargo.

    Wells Fargo has a solid history but what about its recent financial status? Just as solid as before. Wells Fargo consistently does well, they can survive more financial environments than our other large banks and have proven that through the last 5 years as I have already explained.

    Wells Fargo's last quarter reported shows a very healthy company. Some points from their 3rd quarter 2012 earnings release supplement's

    • Record earnings of $4.9 billion, up 7% linked quarter (NYSE:LQ) and 22% year-over-year (YoY)
    • Record diluted earnings per common share of $0.88, up 7% LQ and 22% YoY
    • Total revenue of $21.2 billion relatively stable as lower net interest income was largely offset by noninterest income
    • Positive operating leverage; efficiency ratio improvement to 57.1%
    • Pre-tax pre-provision profit (2) of $9.1 billion, up $209 million Lq.
    • ROA = 1.45%, up 4 bps LQ and up 19 bps YoY
    • ROE = 13.38%, up 52 bps LQ and up 152 bps Y
    • Capital levels remained strong. 10.06% Tier 1 common equity ratio under Basel I and estimated Tier 1 common equity ratio under Basel III of 8.02%

    The last one is the greatest to me. BASEL 3 will be a huge event and Wells is the best able to cope with it. I think even if you do not know all about BASEL 3, you can obviously see that Wells is the one to trust for a requirement of more liquid and less risky balance sheets.

    The balance sheet is solid also with these key points, again outlined in their Q3 2012 earnings supplement.

    • Loans- Total period-end loans up $7.4 billion
    • Core loans- Core loans increased $11.9 billion primarily driven by the decision to retain$9.8 billion of 1-4 family conforming first mortgage production- Non-strategic/liquidating portfolio decreased $4.5 billion
    • Short term Investments/Feds funds sold- Balances up $25.8 billion driven by strong deposit growth
    • Securities available for sale (AFS)- Balances up $2.5 billion driven by an increase in fair value as new investments were largely offset by the continued run-off of higher-yielding securities
    • Deposits- Balances up $23.3 billion
    • Long-term debt- Balances up $5.8 billion as $7.4 billion in issuance's were partially offset by $2.2 billion in maturities
    • Common stock repurchases- Purchased 16.5 million common shares in the quarter and an additional estimated 9 million shares through a forward repurchase transaction that is expected to settle in 4Q12
    • Credit- Strong core credit performance; $200 million reserve release on strong underlying credit.
    • Effect of regulatory guidance implementation on credit-$1.4 billion reclassification of performing consumer loans to nonaccrual status. $567 million in net charge-offs fully covered by loan loss reserves

    I think Wells is poised to do well in the upcoming macro of 2013 with its consistent earnings, conservative culture and fortress balance sheet. I would recommend buying it for a domestic play, financial sector play, mortgage play (Wells Fargo is the largest originator of mortgages), Dividend play, large cap play and value plays. This stock can meet each of those purposes for your portfolio.

    Thanks for reading my article and have a good day.

    -Mike.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: BAC, JPM, WFC, long-ideas
    Nov 26 6:26 PM | Link | Comment!
  • My Portfolio (Pt-1 Long Positions)

    I have been following stocks since I was about 6 or 7 years old. I would always try and read the newspaper and besides my favorite part of reading the comics and weather I would always turn to the stocks page and wonder, "What the hell does all of these numbers mean"? Years later I am in college and planning on making some of my career in stocks, I know it's what I want to do.

    This is my personal stock portfolio. It's simulated, but I try not to tell myself that and I treat it very professional. I would like to hear you guy's opinion on it and of course correct my amateur mistakes.

    It's a long/short portfolio, I think shorting stocks is the best way to make money since most investors cannot do it (mutual funds, pensions and institutional) and the ones that can usually do not take advantage of it. I will only show my long positions though and discuss my shorts in another one being that I do not want to write a very long article and you guys not even read it!

    I run 4 other simulated portfolios, but they are boring and much longer term, this is my main baby right here. I will go down by my largest holdings. The portfolio is not that old, maybe about 3 weeks. The name of the portfolio is Morrison International Investments and the objective is absolute return through just about any asset class, but mainly Japanese and American companies and gold.

    Spyder Gold Fund (NYSEARCA:GLD) -25% of portfolio- Of course gold is the cornerstone of any worthy portfolio in these Bernanke days. I have 25% because I believe gold does not abide by regular investing philosophy. Usually I would highly, highly advise anybody to not put more than 20% in any single asset. Gold does not apply by this rule due to its liquidity, long term vision and of course the most massive debasement of world's currencies in history.

    Wells Fargo (NYSE:WFC) -20% of portfolio- I bought this company for its conservative leadership and stellar increasing EPS. I think Wells Fargo is the only bank in America that is not a crook and the only one that I can actually understand. Wells Fargo is also the biggest originator of new Mortgages and they have made some great acquisitions in the past (Wachovia). From a marketing, economic, accounting and legal perspective they are very healthy, even though they trade at around 1.2x book value and BAC trades at a .6 discount. I would rather pay up for a good company then get a bad one at a severe discount.

    Google (NASDAQ:GOOG) -20% of portfolio- These guys have some of the best products on earth and many people use them every single day. Google is in a good industry to be in for the 21st century and they are doing well to enter foreign markets. I am worried about their reliance on advertising so much, but you got to take some risk and I am willing to put that risk in Google's hands than any other tech company right now.

    Toyota Motors (NYSE:TM) -10% of portfolio- Toyota is the world's best manufacturer in my opinion. I think they are in a good position with the yen devaluation and they have an automobile suitable for every person on earth. German manufacturers are decent, but they are not for the masses and American car companies mine as well liquidate and return cash to shareholders, especially since Obama has pretty much bought GM and regulated the car industry to the teeth with fuel standards and Obamacare.

    Treasuries long term ETF (NYSEARCA:TLT) -10% of portfolio- In the crazy world of the past couple of years you need some safety and liquidity. While I do not think treasuries are nowhere as safe as people think they are they are being bought by the largest purchaser ever seen in history(77% of treasuries bought by Fed in 2011) and the public still buys into the fairy tale, so why fight the Fed?

    Proshares Ultrashort Yen (NYSEARCA:YCS)-10% of portfolio- While the American central bank has promised to QE infinity indirectly, the BOJ has said outright that they will essentially print at will and never end the program, shoot they have been at it 20 years from what I understand. The yen cannot stand up to this and a decelerating Japanese stance in the world (I hate to say this, I love Japan).

    Apple (NASDAQ:AAPL) -10% of portfolio- These guys have just been oversold in the past few weeks they are my newest entry and I will flip out of it as soon as hedge funds stop selling it into the ground. I do however not like investing in places where everyone seems to be putting their money. I do not care if they have 120 billion on their balance sheet; it just seems too good to be true and every time I followed my instinct in that matter it's helped immensely.

    TJ Maxx (NYSE:TJX) -10% of portfolio- Tj Maxx is a good hedge for a future recession in America. I do not want to go into the shopping season owning a traditional retailer as they may get clogged up with inventory. TJ Maxx des well when inventory builds up to high as they can bid down the price they pay. Also I shop here myself and this is my Peter Lynch stock. I actually bought into this stock without even looking at the financial statements, as I am trying to use my shopping experience to purely judge it.

    That's it for my longs. If you guys have any comments on the allocation, stocks themselves or anything else I would love to hear it. Thanks for reading my article and have a good day.

    (I have over 100% because I trade on margin).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Nov 25 7:00 PM | Link | Comment!
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